Association of American Railroads v. Department of Transportation

Few norms are as deeply embedded in our constitutional order as the prohibition against acting as a judge in one’s own case. This is why, under the Due Process Clause, the Supreme Court has held that a self-interested corporation “may not be entrusted with the power to regulate the business of another, and especially of a competitor.”

Yet entrusting a government-backed corporation with regulatory power over its competitors is precisely what Congress attempted to achieve with the 2008 Passenger Rail Investment and Improvement Act. Notwithstanding the fact that Amtrak’s board members have a fiduciary duty to maximize profits, Sec. 207 of the Act requires Amtrak and the Federal Railroad Administration (FRA) to “jointly” develop intercity-passenger-rail standards, which must if possible be incorporated into Amtrak’s contracts with its freight railroads. In practice, the Act gives Amtrak a unilateral veto power over the setting of legal standards for the freight railroads with whom it competes for trackage rights — a critical input for rail service.

The Association of American Railroads, which represents the rail companies subject to these regulations, sued the Department of Transportation in 2012, arguing that Sec. 207 of the Act is unconstitutional. The legal battle went all the way to the Supreme Court, which sided with the government in finding that the regulatory scheme did not represent an unconstitutional delegation of congressional lawmaking power. The Court, however, left it for lower courts to determine whether Sec. 207 violated the Due Process Clause.

On remand, the D.C. Circuit held that this scheme violates due process by permitting Amtrak, a self-interested market participant, to regulate its competitors. Ultimately, however, the court purported to cure this constitutional defect by severing a clause calling for an arbitrator to break the impasse if Amtrak and the FRA cannot agree on what standards to adopt. The problem, of course, is that this revised regime gives both the FRA and Amtrak a veto over any new standards. That is, the FRA cannot adopt any regulations that do not align with Amtrak’s self-interest. Amtrak thus continues to wield regulatory power. Amtrak is legally empowered to block regulations that the FRA would adopt in its unilateral discretion, and thus Amtrak can hold the regulatory process hostage and extort concessions that serve Amtrak’s pecuniary interest.

The D.C. Circuit’s decision could have troubling consequences. There are now hundreds of federal and state government corporations, which often operate in the commercial sphere. Those corporations already enjoy various advantages thanks to their parentage. The decision below gives Congress and the states the green light to grant them another, far more troubling competitive edge: the power to decide what rules will — or will not — apply to their industries.

Now on petition to the Supreme Court, the Cato Institute and the National Federation of Independent Business have joined a U.S. Chamber of Commerce brief in support of the Association of American Railroads, arguing that the Supreme Court should take this case and clearly establish that government cannot subject industries to regulation by their competitors. Just as the U.S. Postal Service should not be able to regulate Amazon or FedEx, and the Tennessee Valley Authority should not be able to regulate the energy markets, Amtrak is constitutionally prohibited from setting legal standards governing the trackage rights of its competitors.